#personal finance May 2nd, 2021

How You Could Be Losing 40% Of Your Investment Returns

Cody Norman

If I were to ask you to name your investment returns and the fees you paid, which do you think you’d have a better chance of answering?

Most people would rather lovingly gaze upon their beefy returns instead of thinking about how much of their returns they sacrificed to fees.

Strong returns are an essential part of any portfolio, but many people really underestimate the impact these seemingly small fees can have, especially over a long time frame. Just like a small leak in your house can cause disaster, small fees can have serious impacts on your returns over the long haul.

Consider $10,000 with an 8% return on investment compounded monthly. With paying no fees, in 20 years you’d have $49,268. However, paying just 0.5% in fees after 20 years you’d have $46,880.

As the great value investor John Bogle of Vanguard said:

The miracle of compounding returns is overwhelmed by the tyranny of compounding costs — John Bogle

Honestly, this article could be like 80% John Bogle quotes. If you’re not familiar with John Bogle, he founded Vanguard and is credited with creating the first index fund.

You’ve been hearing everyone talk about the magic of compounding returns with time. Albert Einstein reportedly had an excellent quote on compounding returns but at this point, who can believe anything billed as an ‘Einstein Quote’ on the internet anymore? Regardless, it illustrates a great point

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it — Einstein?

Fees can have an equally powerful effect on your returns. In the same way time and compounding returns can substantially increase your nest egg, fees can erode those sweet, sweet returns you’ve been cultivating.

What are some realistic fees you might encounter in the wild? ETFs and Index funds are on the usually lower end since they are more passive and are usually somewhere around 0.2%.

Mutual funds are typically much higher. Often in the ranges of 1% — 2.5% because they’re ‘actively managed’ meaning you’re paying extra to pay for the cost of all the buying and selling the fund manager is doing hoping he can let everyone know he ‘beat the market’ the next time he sends out an update.

Sounds fun, but I would prefer not to fork over my nest egg to someone who will charge me for using my money to try to beat the market. An additional thing to consider about Mutual Fund fees is not only do they typically have a higher expense ratio, the fees you’re charged for being part of the fund, they also can have higher fees on trades and can include fees to buy into or out of the fund.

The greatest Enemies of the Equity investor are Expenses and Emotions. — John Bogle

Johnny B. dropping more gems. I’m only being so informal because John Bogle’s investment views have shaped my own so much, it feels like we’re on a first name basis (please don’t close my Vanguard account for this).

Relating to the quote above, in my opinion mutual funds pass the expenses along to me while riding on the emotions of the fund manager. To that, I say a polite no thank you.

This is why I’m such a big proponent of index funds and ETFs. Lower the fees to a minimum, automate, and do all that you can to take out emotion, yours or the fund managers, out of the equation.

In case you’ve already forgotten about the example from above, consider this.

A fund returning 5% annually with a 2% fee will eat 40% of the returns.

That’s the stakes we’re dealing with. It’s really astronomical the impact that fees can have but so many people have no clue how many and what types of fees they’re paying.

How do we find out the fees an investment charges? If you’ve having trouble sleeping you can review this document from the SEC detailing how to review a prospectus for fees but most finance sites like google or yahoo finance will that that information after you enter the ticker.

If you can still hear me from way up on my soapbox, let’s talk about some low fee options to consider, and some higher ones we can steer clear from. Low fee options

Pretty much anything Vanguard does is going low fees and low maintenance. They’re one of the pioneers of set-it-and-forget it focusing on value, low fees and disciplined investing.

Some of my favorite vanguard funds are: Vanguard S&P 500 ETF (VOO) Vanguard High Dividend Yield (VYM), Vanguard Total Stock Market ETF (VTI)

Despite my affection for Vanguard’s philosophies and funds, there are many many other great low fee options out there.

Just because some mutual funds tend to have higher fees, that doesn’t always have to be the case. Fidelity ZERO Large Cap Index Fund (FNIL) has a 0% expense ratio. Not too shabby.

For some slightly higher options, there are numerous options for some flavor of an S&P 500 Index.

Schwab S&P 500 Index Fund ( SWPPX) has the lowest at 0.02%. Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV) are both at 0.03%

Past performance does not indicate or guarantee future performance, but the moment you invest into an option with higher fees, you are immediately in the hole. Closing Bell

There’s certainly no one size fits all answer for if all fees are bad. Everyone’s financial situation is different with different opinions.

I wanted to illustrate just how much of your returns can be eroded by seemingly small investment fees and provide you with the tools to make the best financial decision.

If you enjoyed this article, give it some claps so others can find it, or let me know which parts you enjoyed in the comments.